TLDR
- Powell delivers his final Jackson Hole speech as Fed Chair on Friday, with markets expecting signals about potential September rate cuts
- Some Fed officials including Beth Hammack and Jeffrey Schmid expressed caution about cutting rates next month given recent inflation data
- President Trump has increased political pressure on the Fed, demanding Fed Governor Lisa Cook’s resignation over mortgage loan controversy
- Powell is expected to announce changes to the Fed’s policy framework, likely dropping average inflation targeting in favor of a simple 2% target
- Bond markets are particularly vulnerable to Powell’s speech, with the 10-year yield near 4.3% and light summer liquidity creating potential for sharp moves
Federal Reserve Chair Jerome Powell will deliver his final Jackson Hole speech on Friday morning as markets await signals about potential interest rate cuts. Investors have assigned roughly 69% odds to a 0.25% rate cut at the Fed’s September 17 meeting.
The speech comes as Fed officials remain divided on the timing of rate cuts. Cleveland Fed President Beth Hammack said Thursday she would not support reducing rates if the meeting were tomorrow. Kansas City Fed President Jeffrey Schmid also urged caution on September cuts given recent inflation data.
Other Fed officials including governors Michelle Bowman and Chris Waller have been more vocal about the need for rate cuts. The current benchmark rate sits in a range of 4.25% to 4.50%.
Political pressure has intensified around the Fed in recent weeks. President Trump has called for Fed Governor Lisa Cook to resign over two mortgage loans she obtained before joining the central bank. The Department of Justice reportedly sent Powell a letter calling for Cook’s removal.
Trump has repeatedly criticized Powell, referring to him as “Too Late” for not cutting rates earlier this year. Treasury Secretary Scott Bessent has suggested the Fed should consider a 0.50% rate cut in September.
Fed Framework Changes Expected
Powell is expected to announce changes to the central bank’s policy framework review during his speech. The Fed is likely to drop average inflation targeting, a policy implemented before the pandemic when inflation was running low.
Average inflation targeting allowed the Fed to tolerate inflation above 2% if it had previously run below that level. The policy aimed to prevent deflation during the low-inflation period of the 2010s.
Given recent inflation pressures, the Fed plans to return to a simple 2% inflation target. Powell signaled this change in a speech in May, noting that participants thought it appropriate to reconsider the language around shortfalls.
The Fed first created its monetary policy framework in 2012 and adjusts it every five years. The 2020 framework changes contributed to keeping interest rates low even as inflation accelerated in 2021.
Market Impact and Global Attention
Bond markets are particularly sensitive to Powell’s remarks. The 10-year Treasury yield has been hovering near 4.3%, with light summer trading volumes making markets vulnerable to sudden moves.
Global markets are taking a cautious approach ahead of the speech. Asian stocks posted modest gains while European markets traded flat as investors avoid making large moves before hearing from Powell.
Wall Street has shown a sour mood recently following weak earnings reports and a losing streak that has dented investor confidence. The uncertainty around Fed policy has contributed to market hesitation.
Powell noted in May that inflation could be more volatile going forward than in the 2010s. He suggested the US may be entering a period of more frequent supply shocks that could affect price stability.
The Fed chair also emphasized enhancing the central bank’s communications, particularly regarding forecasts and uncertainty. Changes to the quarterly Summary of Economic Projections and the dot plot may be announced.
Deutsche Bank’s chief US economist Matt Luzzetti expects Powell to restore a more preemptive monetary policy strategy. This would represent a shift from the reactive approach that characterized recent years.
Powell’s speech marks his final Jackson Hole appearance before his term as Fed chair ends next year. The combination of policy decisions and political pressure makes this address particularly consequential for financial markets and Fed independence.
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